BEIJING / TOKYO (Reuters) — Investors
fretting over the impact of China's economic slowdown on its once
red-hot emerging market peers have a powerful ally in Beijing's
leadership, which has both the means and strong motivation to
forestall a sharp downturn.

Economists at government think-tanks and China watchers say Beijing
will act if the economy loses traction too quickly, threatening
financial and social stability, as it pushes towards more balanced
and sustained economic growth.

That comforting message comes with a caveat: while Beijing may yet
again hit its growth targets it does not have much margin for error.
It must keep the economy on an even keel while at the same time
pushing reforms.

"The economy is fragile right now and the downside risk could be
very big if there are any external shocks," said Li Heng, an
economist at Minsheng Securities in Beijing.

China's intended shift from three decades of double-digit,
investment- and export-fuelled growth towards a slower, but more
balanced and sustained expansion more geared to consumption and
services, has been well telegraphed.

Yet every set of weak data jolts global financial markets from
Brazil to Australia by raising questions about the risk of an
uncontrolled slump and the toll it could take on economies relying
on Chinese demand.

The last bout of angst over China's outlook was triggered last week
by an HSBC/Markit business survey that suggested manufacturing
activity dipped in January for the first time in six months.

The data coincided with renewed signs of tightening in China's
financial markets and worries a troubled investment product could
set off a debt scare, factors that added to wider concerns about
emerging markets and prompted the global selloff.

MAINTAINING GROWTH

The majority view of China economists polled by Reuters remains that
Beijing will manage to sustain economic growth broadly in line with
both last year's 7.5 percent growth target and the International
Monetary Fund's predictions.

Beijing has yet to officially announce its 2014 growth goal and
there has been speculation it might drop the practice altogether to
underscore the importance of economic reforms. Most pundits,
however, expect the authorities to reaffirm the target to reassure
markets.

They expect China to achieve that growth while ticking the boxes of
its ambitious reform agenda unveiled last November, with the central
bank pushing to relax regulatory curbs on interest rates and the
currency, alongside the government's drive to cut red tape and open
up sectors dominated by state giants to private firms.

The central bank's campaign to curb risky lending underscores
Beijing's greater tolerance for a slower pace of growth, but
policymakers are aware that an abrupt slowdown, its resulting job
losses and bankruptcies could derail reforms.

So analysts expect authorities to provide measured economic support
if they see signs of excessive weakness, which many assume would be
if annual growth slips below 7.5 percent and towards 7 percent.

In that case, the central bank could pump more liquidity via money
market operations into the financial system and the government could
crank up budget spending, the sort of measures that were employed in
2013 to support growth.

Reducing bank reserve requirements or interest rates would be a last
resort, analysts said.

"The authorities will tread cautiously, quickening reforms when the
economy is on a sound footing and slow down a bit when downward
pressures increase," said He Yifeng, senior economist at Hongyuan
Securities in Beijing.

With debt piling up — Fitch estimates debt from all sectors reached
218 percent of GDP in 2013 — spending hundreds of billions of
dollars the way China did at the onset of the global financial
crisis is no longer viable.

But last year Beijing still managed to engineer a mini-upturn when
growth dipped mid-year with stealthy stimulus spending on selected
areas such as rail networks or urban services.

Zhang Hanya, a researcher with the National Development and
Reform Commission, the top economic planner, said China could do the
same again if necessary, activating projects put on hold since 2010.

"We cannot see signs of a sudden economic slowdown. There are many
areas that need investment and economic growth will rebound
immediately if they loosen monetary policy."

"PERIODIC SCARES"

The central bank, whose campaign to rein in growth of risky
investment products led to several cash crunches in 2013, has also
demonstrated willingness to step in and pump liquidity to prevent
markets from seizing up.

Yet despite the consensus that the authorities will not stand idle
if the economy wobbles, consensus forecasts mask divergence in views
about the near-term impact of reforms.

Pessimists expect growth to slow to around 7 percent or less this
year from 7.7 percent in 2013 because of short-term reform pain:
efforts to tighten credit markets to counter risky lending and a
push to reduce overcapacity in sectors such as steel or mining.

Optimists bet global recovery, the early benefits of cuts in red
tape and the opening up of protected sectors, will drive growth to
around 8 percent this year.

Such a divergence of views, rare in past years when Beijing's
singular focus was on rapid growth, underscores heightened
uncertainty and risks as Beijing blazes a trail on several fronts.

The central bank's trouble in calibrating its liquidity management
and devising best strategy to deal with shadow banking, largely
off-balance sheet lending, which it wants to restrain, but not shut
down, are a case in point and a source of market concern.

All bets would be off if shadow banking strains escalated into a
full-blown banking crisis, but China watchers like UBS economist Tao
Wang consider that a remote risk.

Her base scenario assumes growth of 7.8 percent, but comes with a
warning that exposure to China will not be for the faint of heart
given expected repeated spells of liquidity and credit volatility.

"While China equity investors mainly worry about weaker earnings as
a result of higher funding costs ... other investors may face
periodic scares of systematic risks concerning the financial system
and the economy," Wang said in a report. "While we think the latter
is very unlikely, such concerns in the market could nevertheless
bring large shocks to related markets."